Press Release: IMF Team Completes the 2008 Article IV Consultation Discussions with Japan

May 22, 2008

Press Release No. 08/118

An International Monetary Fund (IMF) team, led by Mr. Daiel Citrin, Deputy Director of the Asia and Pacific Department, visited Tokyo during May 13-22 to conduct the annual Article IV review of the Japanese economy. The team held discussions with senior officials from the government and the Bank of Japan (BoJ), and private sector representatives on recent economic developments and the policy challenges ahead.

At the conclusion of the visit, the mission issued the following statement:

"The Japanese economy has shown resilience to the slowdown in the United States and global market turmoil. The pace of activity in the first quarter of 2008 was robust, led by strong exports to non-U.S. destinations and household spending, but the momentum is set to slow in line with lower global growth and the deteriorating terms of trade. The IMF team projects GDP growth to moderate to around 1½ percent in 2008-2009 owing to weaker business investment and private consumption. CPI inflation will pick up somewhat, reflecting higher commodity and fuel prices, but underlying inflation should remain subdued.

"The outlook is subject to considerable uncertainty surrounding the depth of the U.S. slowdown and future developments in commodity prices and financial conditions. Domestically, the weak health of the SME sector remains a particular concern. On the other hand, on the upside, continued strength of emerging markets could provide additional support to exports. In these circumstances, near-term policies should support the expansion while safeguarding financial stability.

"Monetary policy should remain on hold until concerns over the outlook ease. Also, the BoJ has taken useful steps to expand its communication regarding the outlook and the conduct of policy in its April "Outlook for Economic Activity and Prices". These efforts should help anchor inflation expectations during this period of more volatile price changes. The BoJ should continue its flexible approach to meeting liquidity needs, which has proved successful in maintaining stability in money markets.

"Fiscal policy should be guided by the need to reduce the already high debt burden and to address the demands from an aging population. Over the last four years there has been a substantial and greater-than-expected reduction of the primary deficit (excluding social security). The authorities plan to achieve a primary balance by FY2011. But the mission's view is that additional fiscal adjustment is needed to put the public debt ratio firmly on a downward path. With expenditure cuts nearing their limits, fiscal consolidation will require revenue measures, including raising the consumption tax and broadening the income tax base.

"Financial policies should guard against spillovers from the global market turmoil and risks from a slowing economy. Consistent with the recommendations of the Financial Stability Forum recently endorsed by the G-7, policy priorities are to ensure adequate capital levels and strengthen risk management, particularly for regional banks. In addition, further reforms are needed to improve financial intermediation, boost core profitability, and manage the privatization of Japan Post to ensure a level playing field for all institutions.

"The pace of structural reforms has slowed, in part reflecting concerns over widening inequalities. However, it is the mission's view that vigorous reforms are precisely what is required to deal with Japan's various medium-term challenges by lifting growth prospects, bolstering the economy's resiliency to shocks, and contributing to global stability. The priorities remain to enhance labor market flexibility and promote competition and productivity through further deregulation and market opening."


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